Your profit margin shows is a calculation that shows how much your sales revenues exceed your costs. When you know this figure, you report it as net income, or income after expenses. A profit margin is narrow when there is a large difference between your net income and net sales. Narrow profit margins typically sit lower than 5%, but that can differ between industries. Dentists tend to have an average profit margin of 15%, so an 8% number qualifies as a narrow profit margin. In some industries, a narrow profit margin proves to be the norm. Grocery stores often operate with a profit margin of just 1% or 2%.
Calculating Your Profit Margin
To calculate your small business’ profit margin, divide your net income by your net sales. Let’s say your business collects $100,000 in net sales with net income of $20,000. Dividing $20,000 income by $100,000 sales gives you a 20% profit margin. That means your small business keeps an average of 20 cents for every dollar you collect.
Improve Narrow Profit Margins
If you want to improve your profit margin, you need to either reduce your costs or charge more for your products or services. If a narrow profit margin is the industry standard for your small business, it can be helpful to focus on repeat customers and higher sales volume to counteract the relatively low profit margin.
Planning Ahead with Profit Margins
Tracking your profit margin helps you predict the portion of each sale that translates to profits, making it easier to plan ahead for your small business’ future. It’s also useful for measuring higher or lower profitability. If you calculate profit margin on single items or services you sell, you can see which ones provide you with a better return on your investment.
Your profit margin can help you make decisions about the way you do business, making it essential to know as you break new ground. QuickBooks Online helps you track your profit margin along with numerous other financial figures. Keep your books accurate and up to date automatically. Change the way you manage your finances now.